FX Daily: It’s time to talk about 50BP?
USD: Abundant USD Abundance of Fed Besent comments
Comment of Minister of Finance Scott Besent about The Fed yesterday added fuel to Fed Dovish betting. The SWAP level of two years USD fell 6BP yesterday to below 3.40%, around 10BP under CPI Pre-As. Bessent said the FED tariff must be 150-175BP lower, and that the September cut must be 50BP. The market does not give any price to more than 25BP for now, and the 50BP option may not be considered serious unless there are some instructions in that direction at the Jackson Hole symposium (August 21-23), or August job data is very disappointing again.
The dollar had started the day with the hind legs yesterday, and did not seem affected by Fed Besent’s comments. What might help Greenback is a bescent disagreement with the idea of EJ Antoni to reduce the frequency of work reports.
Today’s highlight is PPI July, which is expected to increase by 0.2% both in the main header and core series. It must strengthen the market view that inflation lumps can be tolerated from the FED perspective. Another release that we will watch continues, which jumped to 1974k last week.
The closeness to the Trump-Putin meeting tomorrow may oppose the addition of more USD shorts first. But can still be negative negative for greenback.
EUR: good momentum to the Trump-Putin Summit
EUR/USD approaches the As-Russian Summit tomorrow with good momentum, and the option market does not seem to provide prices in the risk of large volatility. The volatility of one week is EUR/USD is at the bottom of the latest range and is in line with historical volatility.
Today, the euro zone calendar includes the second 2Q GDP release. Sophisticated prints are QoQ 0.1%, although the market gives a limited weight given the severe tariff distortion. The production number of the Euro Zone Industry for June is also published today: Hope is for soft molds after Germany reported a surprise -3.6% Yoy.
EUR/USD can stabilize around 1,170 for today, with a balance of risk that is still leaning up.
Elsewhere in Europe, Britain issued a stronger growth rate than expected for 2Q: QOQ 0.3% and 1.2% Yoy. It shows the growth of decent underlying activities even though the lower distortion is induced by tariffs. This is a positive news for the gold market ahead of the fall fiscal event, but does not change the narrative for the Bank of England at this time (the inflation and work market is two main inputs), so the reaction in Sterling has been muted.
Nok: There is no surprise by Norges Bank today
We are reviewing Bank Norges’s tariff decisions today in this note. We think the conditions for other surprises such as in June were not there this time. The underlying inflation has recovered to 3.1%, the CPI Headline is at 3.3% and Krone has been materially depreciated lately. The only rival is a rival is a decrease in the price of new oil, but the rather secondary.
This is a temporary meeting, so there is no new level or economic projection issued. We hope that Norges Bank will keep the door open for more easing this year, with some risks of tweaks that are a little hawkish in communication. Market is the determination of zero prices for slaughtering opportunities today, but 45BP at the end of the year.
We currently expect a 25BP reduction in September and December, but recognize the risk of leaning to only one sticky inflation given. EUR/NOK remains expensive, but the sensitivity of oil prices for the main russian-Ukraine canopy means that the noise is at risk of short-term volatility. Our call is still to return to 11.60-11.70 at the end of the year.
CEE: Divergence between FX and the tariff shows an increasingly greater imbalance
Following yesterday’s GDP prints in Poland, today we will also see numbers from Romania. However, after Tuesday’s inflation rate, it is difficult to see GDP significantly change the story. Then today, the last inflation rate for July in Poland will also be released. Although CPI dropped significantly from 4.1% yoy in June to 3.1% yoy, we believe this decline was not enough to justify the 50BP tariff deduction as previously expected. Conversely, we now expect a more gradual loosening path, starting with the 25BP cutting in September, followed by a similar movement in October and November, bringing the main level of NBP policy to 4.25% at the end of the year.
In the market, we can see the ongoing difference between tariffs and FX. We see a similar story in both markets. Market tariffs head down under pressure from the decline in the core market and more hope of Dovish regarding Fed level cutting. At the same time, CEE FX benefited from a weaker US dollar and the prospect of progress in the Ukraine-Russian conflict and lower energy prices. However, as we discussed here yesterday, while the tighter differential level seems more justified, FX may be more fragile. Therefore, we believe it is better to continue to monitor the gap between this tariff and FX in the coming days, helping to navigate ahead of Friday meetings with rather binary results.
FRANTISEK TABORSKY
Source: Ing
